Jonathan Williams reports on niche bonds that are growing in prominence as they move into areas previously filled by charities and the government
The social benefits of investment can present themselves in several ways: a company’s ability to attract capital gives it the funding to hire staff and pay wages; funding infrastructure or housing benefits the community or the individual, either by boosting a vital network or granting shelter; and all of these generate tax revenue that can be used for the benefit of a country by its government.
But actors in this sphere still pursue a profit motive despite the potential for investments to be styled as impact investments. The Ireland Strategic Investment Fund, with its dual goals of economic growth and return, or the numerous private institutions developing social and affordable housing in recent years, all pursue projects on an economic basis, separate from the impact desired by charitable foundations.
Within this sector, a new asset has recently emerged, filling the space often vacated by cash-strapped governments, or charities seeking to attract funding for specific projects without using the usual fundraising tools available to them: the social impact bond (SIB).
The name derives from the fact that payment, unlike other fixed-income instruments, is not a pre-determined matter. Structured as a payment-by-result system (PbR), the bonds, for example, help, in the words of the UK Cabinet Office, “achieve significant social outcomes by providing working capital to voluntary, community and social enterprise providers”. One concrete example was the financing the sourcing and training of new adoptive parents and helping place children that would otherwise remain within the care system and supported by the state. Others include payments linked to the unemployment levels of migrants increasing faster than a pre-determined control group, as a result of the programme which the bond was funding. The SIB was first used in 2010 by the UK government to finance a programme aimed at prisoner rehabilitation. Investors in the bonds are clearly still financial investors, but the emphasis is split between both social benefits and financial returns.
This emphasis is apparent when discussing where SIBs have so far fallen within the portfolio of some pension funds, such as the five English local government pension schemes involved in a so-called investing for growth initiative. Launched in 2013, the funds – Greater Manchester Pension Fund (GMPF), West Midlands, East Riding, West Yorkshire, Merseyside and South Yorkshire – the initiative aims to demonstrate that their fiduciary responsibility could align with investments that could create positive social outcomes.
“Impact investing for pension funds is a new area of activity and I hope that, having established the investment potential, other funds will join us in seeking further opportunities,” Councillor Kieran Quinn, chair of GMPF said when launching the initiative.
GMPF, for example, invested in a scheme run by Manchester City Council to support foster care, helping children with developmental issues to transition back into family settings.
Growth in the sector has been driven by the Social Impact Investment Taskforce, an initiative established under the UK presidency of the G8 group of leading industrialised counties in 2014, which focused broadly on the theme of impact investing, but also examined the notion of SIBs.
The market’s relative youth goes some way towards explaining why it only accounts for a fraction of the perceived impact investing universe, captured in a survey by JP Morgan and the Global Impact Investing Network. The Eyes on the Horizon report found that of those surveyed, investing $60bn (€54bn) in various impact investing assets, only 0.2% were within the PbR universe.
Social impact bond issuance
• Migrant unemployment: €234,000 issuance, backed by Belgian government. Investors entitled to yield of 6% if employment targets are met.
• Out-of-home care: Australian bond, which limited capital losses to 25% of investment for first four years, saw success linked to preventative programme of children entering out-of-home care, each placement estimated to cost the Australian government AUD37,000 (€25,000).
• Homelessness:Funding for homelessness strategy in effort to get rough sleepers off the streets as soon as possible, in turn reducing cost for the UK health service.
In an attempt to boost the market, the UK government has established a Centre for Social Impact Bonds, listing recent successful issuances and their application.
But interest in SIBs has not just been limited to the UK. Three Nordic countries have also set up a network to cultivate the growth of SIBs. The Belgian government has shown an interest, as has the Finnish, adding their names to the issuers behind the 25 or more bonds brought to the market between 2010 and 2014, according to the Forum for Social Innovation in Sweden.
In the Finnish example, announced late 2015, the Finnish Ministry of Employment and the Economy partnered with the publicly owned Finnish Innovation Fund to issue a SIB aimed at creating employment for immigrants. Topical at a time when European states are seeing levels of immigration unprecedented since the post-war boom, it aims to offer training to the new arrivals and improve their employability.
Similarly, the Belgian government announced a collaboration with the International Committee of the Red Cross in January at the World Economic Forum, born from ideas contained within a report to the UN on new financing mechanisms to address the ever-increasing financing need for humanitarian aid.
“With 80% of needs being recurrent and protracted there is no reasonable argument to be made against shifting some of the funding burden to modes of public-private portfolio investments,” the report, Too Important to Fail, said. “Innovative financing for recurrent and protracted humanitarian costs, such as green or social impact bonds, call for creativity, risk-taking, patience, collaboration and resources.”
The reasoning for such an approach, the report added, was to break what it regarded as the cycle of inadequate funding from donor governments and the over-reliance on annual private donor funding.
Other bonds issued in the UK include one aimed at reducing homelessness, which sought to bring about a reduction in rough sleeping, but also an increase in former rough sleepers in both work and permanent accommodation, or return them to the country of origin when not UK citizens.
It is areas such as these where SIBs and general impact investing, as well as an emphasis on real assets, can blur.
One example of such blurred lines is the desire of Nigeria’s National Pension Commission, the country’s regulator, to see a growth in the infrastructure investment by the funds managing NGN5.2trn (€23.6bn) in assets for 7m savers.
“We are pushing at the Pensions Commission that the biggest beneficiaries should be the contributors and retirees alike,” says Chinelo Anohu-Amazu, the body’s director-general, highlighting the importance, in her view, of the sector investing in tangible assets, such as infrastructure, that can be seen by members as a way of building trust.
She also notes the shortage of housing facing Nigeria, and the role that could be played by chanelling pension savings either into mortgages or, perhaps, following the European example of funnelling capital towards social housing.
The work undertaken by governments in the area of SIBs, one that attracts relatively small issuances in the tens of millions, suggests that they take seriously the need for guidance in areas where there may not be multi-billion funding proposals, and gives hope that across several potential impact investment areas, such as social housing, the need for private sector capital will lead to sensible frameworks over hollow rhetoric calling for private investment.